JotCast | September 2023 Capitalist Times Live Chat

Return to

September 2023 Capitalist Times Live Chat

Roger Conrad

1:56

Hello everyone and welcome to our Capitalist Times live chat for September. We very much appreciate you joining us today and look forward to a lively session.

1:58

As always, there is no audio. Just type in your questions and we'll get to them as soon as we can comprehensively and concisely. We will as always send you a link to the complete transcript of all the Q&A after we sign off, if you can't stick around.

2:00

By way of pre-chat questions, we did things a bit differently this month. Rather than answer them in bulk to post here, we tried to answer them directly. If we did miss yours, we do apologize. But please feel free to ask again today.

2:04

One company we did receive several recent queries about was WP Carey (NYSE: WPC), which announced last week that it will spin off its remaining office properties as a separate REIT. The stock market has reacted negatively to the news, very likely in part because the post-spin WPC intends to "reset" its dividend to a lower payout ratio to accelerate investment. But we believe the sum of the parts is now worth considerably more than a low 50s price for WPC--and in fact the combined dividend of the spin plus WPC is likely to be at least in the neighborhood of the current payout--with new WPC likely to grow a lot faster. We still rate it a buy for those who don't already own it.

Alex M

2:10

Hi Roger. What are your thoughts on BCE and its ability to maintain the current dividend? The stock has been dropping rather substantially lately and like most telecoms, they have a rather large debt load. Sustainable dividend? Thanks.

Roger Conrad

2:10

Hi Alex. I don't believe BCE's dividend is in any danger at this time. As you point out, telecom stocks have been under a great deal of pressure--and as a Canadian stock, BCE's NYSE price is affected by the strength of the US dollar as well. But despite elevated CAPEX to complete fiber broadband and 5G networks, the company will still generate positive free cash flow after dividends. And there's no sign BCE won't reiterate 2023 guidance when it releases Q3 results in early November. As for debt, the company has no remaining debt maturities this year and has pared down variable rate debt. Debt is a part of capitalization for big infrastructure companies and the cost is rising. But BCE should be able to manage it.

Guest

2:11

Is there a special email address for questions? I sent a question on Aug 30 and didn't hear anything so I assumed you would answer at the beginning of the chat. Karl Eser

Roger Conrad

2:11

Hi Karl. The email for questions is service@capitalisttimes.com. Sorry we missed your question but happy to answer it now.

Alex M

2:16

I've noticed that the preferred shares of PCG have a high yield compared to other utility preferred shares. For instance, the series D yields over 7.7% right now. Is this because of the Hawaii fire, or is there some other risk being factored in? Thanks.

Roger Conrad

2:16

Perceived wildfire risk is keeping the common shares for PG&E at a discount of less than 13x expected next 12 months earnings. So it makes sense that it would be a factor affecting preferred prices. There's also the fact that even PG&E's senior unsecured debt is not yet rated investment grade. And in an environment where recession risk appears to be rising like this one, the yield premium between investment grade and sub-inv grade debt always widens. If you're asking about actual risk to principal and yield, however, I believe it's mis-priced for this utility. The company has greatly reduced wildfire risk the past several years and appears likely to win an amicable rate decision in California this fall. That would enable management to restore a common stock dividend as promised--which can only be paid after all preferred dividends are.

aaron24@cox.net

2:19

Good afternoon gentlemen. Are you suggesting to keep the new spinoff of W.C. Carey?

Roger Conrad

2:19

Hi Aaron. As I indicated in the only pre-chat question answer I posted, I think the negative reaction of WPC's announcement of the spinoff is well overdone. And I intend to keep the shares in my REIT Sheet recommended list through the spinoff. At that time, depending on the price, I may advise selling the spinoff. But sum of the parts looks like it's worth a lot more than the current low 50s price for WPC. And again, it seems likely the combined dividend of WPC plus spinoff will be roughly similar to what WPC pays now.

Ann Rice

2:24

Can California, Oklahoma, & Texas produce more oil thereby supplementing reduced supplies now available & bring down consumer costs @ the pimp?

Elliott Gue

2:24

Texas is home to the Permian Basin and producers there can certainly increase production over time. I would say that the best acreage in the Permian is now generally held by the supermajors like XOM and t he larger independents and they're more focused on free cash flow than production growth. The end result is that you will see growth in output, especially with oil prices in the $80 - $90/bbl range, but you probably will not see the level of growth we say from 2010-2020 any time soon both due to the fact that the bigger producers don't want to drill through their acreage too quickly and because they don't want to repeat the mistakes of the last cycle where they tended to overproduce, causing prices to crash. Oklahoma can also probably see some growth -- the SCOOP/STACK play there is profitable at current prices though it's a bit more expensive than Permian. However, again you're not likely to see the level of growth we saw there in the last cycle. California is a tougher story. I suspect from a

Elliott Gue

2:24

reservoir/technical perspective they could produce more oil and natural gas. However, the bigger players with the technical know-how to produce the more attractive fields in the State will be reluctant to invest there given the "uncertain" political climate regarding fossil fuels. All told, US domestic oil production -- onshore and offshore -- will continue to grow (probably reaching a new record this year of Next). However, that alone will probably not be enough to bring down gasoline prices in the short to intermediate term, because the US will still be a significant importer of oil. The only relief I see for prices would be over the longer-term as a new investment cycle globally results in new supply, breaks OPEC's control of the global market and rebalances supply with demand. That's exactly what brought down prices in the 80's as well.

John R.

2:24

Hi Roger,

A few months ago you offered a fix for the super exorbitant withholding tariff on ENLAY. Could you please reiterate? Thanks

Roger Conrad

2:24

Hi John. The two ways to avoid the ADR fee on Enel SpA would be to either (1) use a service like interactivebrokers.com to buy shares directly in Italy under the symbol "ENEL" or (2) buy over-the-counter listing "ESOCF," which is the Italian share traded OTC in the US. You will still have to pay withholding tax, but you can recover the full amount when you file your US taxes. As for Enel itself, I believe we'll see another round of solid results for Q3 announced Nov 7. The company continues to execute its plans to cut debt and expand contracted renewable energy generation in Latin America, Italy and Spain, especially solar. And dividend growth looks locked in as well. So it's a solid recommendation no matter how you buy it--also very resilient against a potential recession.

Arthur H.

2:31

Many of the First Rate REITs are currently yielding well above 4%; however, four are below 3%. CDPYF, ELS, PLD, and FPI.
Do you foresee the four as likely to have outsized appreciations compared to the other First Rate REITs? If not, would you weigh them equally with the others on the list?
Aside from being quality REITs, are they serving a special purpose, such as diversity or an extra safety measure, as their payout ratio is modest?
I am building a portfolio that tracks the First Rate Reits in a tax-deferred account, looking more for income than outsized growth. I want to determine whether/why I should add any of the four to my budding REIT collection. I have other, more diversified accounts.
Thank you

Roger Conrad

2:31

Hi Arthur. First off, I think this is a very good time to buy these companies from a valuation standpoint. And as we've seen with their results and guidance, they should be resilient in a recession as well. What they don't have right now is positive momentum, which means continuing selling pressure so patience is required.

As for the specific names, I try to represent a range of sectors on the "First Rate REITs" list and my focus is quality, which sometimes means a lower yield. Also, my rule is for the sum of yield plus growth to be north of 10% at the recommended entry point--and some have more growth than yield. I think the best idea is just to diversify and balance investment between several. If you want more current income, focus on the higher yielding rated "conservative" on risk.

Kerry T.

2:38

TLTW is getting uncomfortably close to the 28.25 stop. Do you think it'll get triggered soon or is the runup in long interest rates about over?

regards

Elliott Gue

2:38

Thanks for the question. I'll be covering TLTW a bit more in the next issue. I'd say two things. First, I will probably end up lowering the stop a bit to adjust for the significant monthly distributions paid by TLTW this year. So far in 2023 the company has paid 8 distributions totaling $3.37, which is a lot considering the ETF trades in that $29 +/- region. From an investment perspective, I think Treasuries and, in particular, TLTW offer a very compelling risk-reward here.

Elliott Gue

2:38

Look at it like this. The 30-year Treasury now yields about 4.7%. So, let's say you bought a 30-year bond today and held for the next 6 months, through the end of March next year. If the yield on the 30-year were to rise to 5.20% (+50 basis) points, your loss over 6 months would be -5.4% because the decline in the price of the bond would be offset by the interest coupons. Now, let's say that the 30-year yield instead falls 50 basis points back to 4.2% because, for example, a US recession comes into view. In that case, your return over 6 months would be about 10.84%. Similarly a 100 basis point increase in 30-Year yields over 12 months (to 5.7%) results in a loss of 9.7% on 30-Year Treasuries while a 100 basis point drop over 12 months results in a return of about 22.8%. So, sure, yields could push a bit higher over the next few months but I believe the likelihood is that a spike to 5.7% on the 30-year could quickly hit the economy hard and result in rate cuts that bring down yields. And, over holding period

2:40

periods of 6 to 12 months, there's a lot more upside in 30-Year Treasuries than downside for a similar change in yields. And, of course, the TLTW provides an extra level of returns because of the covered call strategic imbedded in the fund. I like that risk-reward proposition and I still believe TLTW is a good way to protect against downside risk in stocks.

Hans

2:40

Roger, Any impact of Army Corps of Engineers outcome on the DAPL pipeline. Thanks

Roger Conrad

2:40

Hi Hans. The Corps study found that release of crude oil from the Dakota Access Pipeline is "remote to very unlikely" operating on its current easement. It also said "sufficient safeguards are in place" to prevent such an accident. It did not recommend for or against DAPL receiving an easement to continue operating.

That technically leaves the issue hanging. But given the disruption a shutdown would cause--and the absence of language from the Corps study to indicate a real danger of a leak--it seems highly unlikely the Biden Administration would order DAPL shut. The very small risk it would be is another good reason to focus on large, diversified midstream than smaller regional ones. And in fact Energy Transfer, despite being the lead owner, derives only a couple percentage points of EBITDA from DAPL. It's far less at risk than smaller Bakken operators. But again, it seems unlikely DAPL will shut on the basis of the Corps study.

Victor

2:48

Elliott, According to Bloomberg, Harlod Hamm said oil is headed to $150 unless the US government encourages exploration. He also said that he has no intention of boosting production as prices go up. Your thoughts.

Elliott Gue

2:48

Harold Hamm owns the old Continental Resources company (private since late 2022), which operates in Oklahoma and the SCOOP/STACK play. So, that's a bit higher cost than the Permian and has less runway for production growth. So, I'd imagine that for a private company like CLR with limited growth, Mr. Hamm is likely to focus heavily on cash flow over production growth. That means basically treating the company's assets as a free cash flow yield play. The calculus is a bit different for a public company like PXD or XOM -- these names can probably generate some modest growth in production over time (maybe +5% of so annualized) if prices remain in the $80 to $90+ range and maybe a bit more if prices were to climb above $100/bbl and stay there. SO, US production growth could help blunt the impact of rising prices but what the world really needs is a new global investment cycle that goes well beyond US onshore. Until that happens -- and it will take years to have an impact -- there's an oil/energy supercyle underway

Arthur H.

2:50

Timing Question:
REITs, as a class, seem to be absorbing stronger punishment than the rest of the market. How do you foresee REITs behaving going forward, especially when compared to the market in general? In the event of a soft landing, would you expect them to rebound any faster than the rest of the market? I'm thinking probably not, but if they can keep pace with inflation and maintain their yield rate over the long term, I will be more than satisfied.
Thank you

Roger Conrad

2:50

I agree REITs as a sector are generally getting kicked in the teeth lately, even data center owners that had been holding up. I think that's largely because of concerns about a potential recession, as well as the fact that rising interest rates make it far more difficult to finance growth. What I think a lot of investors aren't appreciating now, however, is these companies are only a couple years removed from the absolute catastrophe of Covid lockdowns. And while occupancy, rent collections and rent growth have recovered sharply in most property sectors, management has stayed conservative regards operating and financial policies. That's why more have raised guidance this year than cut, despite the economic headwinds. And while I'm personally skeptical of soft landing scenarios, I think the best are going to perform far better as businesses in a downturn than they're getting credit for now. That means dividend risk isn't nearly as high as price action would indicate. And property does keep pace with inflation.

Roger Conrad

2:53

As for when these stocks rebound, I think a lot of investors right now have the mindset of waiting to buy until the Fed gives us an indication it's finished raising interest rates. I think by doing that they're going to miss a lot of value. But soft landing or hard, when that happens I do think the better REITs are going to greatly outperform the current market leaders--just as they did in 2000 following 1999. And while it's highly likely REIT prices are going lower still--given the Fed is still raising rates--this is a good time to at least start taking incremental positions selectively. Dream Buy prices are ideal.

Dan N.

3:02

Hi Roger - I'm curious: why have you not included Brookfield Infrastructure (BIP / BIPC) in your coverage universe? It seems like an obvious fit: midstream, utilities, transmission, cell towers and data... please count me as a subscriber who would be interested.

Thanks

Roger Conrad

3:02

Hi Dan. That's a good idea, thank you. I will add it to coverage in the MLPs and Midstream universe for EIA, as well as CUI Utility Report Card. We haven't been particularly enamored with Brookfield Infrastructure (BIP, BIPC) primarily because, unlike Brookfield Renewable Partners (BEP, BEPC), it's been so diversified among so many different asset classes without being sufficiently scaled in any. And despite making some good purchases the past few years including in energy midstream, that's still the case--the purchase of intermodal freight container company Triton the latest example. I do think the current asset portfolio is capable of maintaining and increasing the dividend at a mid-single digit percentage rate going forward. And there should not be a debt problem either. But our preference will still be more focused companies.

Dan N.

3:09

Hi Roger - less than a month after asking you about offshore wind challenges and how Northland Power had crashed, they announce all the financing is in place for their projects in Poland and Taiwan. And the market was unimpressed, at least judging by the share price. Your thoughts please?

Thanks

Roger Conrad

3:09

We're still rating Northland Power a buy at USD20 or lower, and it trades just below that now. I do think the company is getting thrown in with other offshore companies that have more exposure to the US where development problems are greater--Orsted A/S being one. And they have a history of strong project execution as well as financial conservatism that I think is serving them well in an otherwise very tough environment. That includes using very well placed and deep pocketed partners for development. The key will be getting these projects up and running in line with their current schedules and budgets. And in the meantime, earnings will vary with wind and market conditions where they operate, as we saw in Q2. But the larger Northland becomes, the better able it will be to balance these risks to generate steadier results. And after a -37% decline in share price this year, I don't think investors are giving them any credit.

Roger Conrad

3:09

It's covered in Conrad's Utility Investor Utility Report Card.

Jeffrey H.

3:17

Dear Folks, I know this question has been posed to you in a number of ways and a number of times -- but here goes again: I keep reading that various official agencies announce that the world is now witnessing "Peak Oil" because of the large-scale coming adopting of EVs. Well, as someone who owns a decent amount of oil/gas related equities (producers, service companies, and especially your top-rated mid-streams), these announcements do make me a bit uneasy.

When do you foresee a serious decline in oil consumption (apart from a major recession)? And do I need to start worrying that I am holding the chips of a dying industry? Might you be under-estimating the speed and impact of EV adoption and its effect on the oil industry (and our equities)?

Thank you

Elliott Gue

3:17

I don't think you'll see a sustained decline in oil consumption in the next 10 years.

It seems like every other year or so for about the past decade someone comes and calls peak demand for oil. Back in 2020, it was BP that predicted that the COVID lockdowns would actually mean that oil demand peaked in 2019 globally. The new CEO announced an aggressive plan to cut oil/gas production and focus on new energy technologies. Seems like about every media outlet in the world picked up on that one.

Fast forward 3 years and BP does an embarrassing U-turn, steps up investment in oil/gas and cuts spending on new energy technologies due to poor returns, and the CEO steps down due to an inappropriate relationship (may well be true or might be they wanted to force him out or perhaps a little from column A and a little from column B?)

Any any rate, most recently it's the International Energy Agency that's projecting peak demand for fossil fuels by the end of this decade (all fossil fuels, not just coal). I don't know

Elliott Gue

3:17

the full details of their latest report because they haven't released it yet. However, looking at their past outlooks, they usually based projections off announced carbon reduction goals or what's needed to reduce carbon emissions by a certain percentage. However, government goals can and do get pushed back (Rishi Sunak of the UK comes to mind recently) and government often miss targets. Also, the IEA also predicted peak coal 7 or 8 years ago, just before coal use soared to a fresh all-time high. The bottom line is that while predictions like this get a lot of play in the media, they've been consistently wrong and they consistently underestimate the pace of global demand growth. I'd say the bigger risk is the opposite -- all these calls for peak demand depress investment, resulting in insufficient supply and higher prices down the road (basically, that's what's happening right now).

Dan N.

3:21

Hi Roger - telecom tower stocks are still trending down it seems, and CCI is now yielding close to 7%. That's high enough that I can afford to wait a long time for market sentiment to turn. Is the dividend safe? How about the general business prospects?

I noted that Morningstar has been particularly critical that CCI has put a lot of capital into fiber and small cells for 5G; they seem skeptical that the 5G infrastructure will have competitive advantages or ever achieve locked in contracts with multiple providers as cell towers have. Your commentary has often highlighted that 5G is coming to the USA... eventually... and that it will be a bigger deal than the market seems to anticipate or value, but it's happening quite slowly and it's expensive in the meantime. Thoughts on how this will play out in an infrastructure sense? Is CCI likely to (eventually) get those recurring, escalating rents from its first-mover small cell networks, or is this materially different than the cell tower business?

Thanks

Roger Conrad

3:21

Hi Dan. I think there's a lot of understandable skepticism about 5G in general ever being a significant revenue generator for telecoms--or the tower companies that serve them. But again, I look at what's happening in China, which did have the benefit of being able to deploy superior technology much faster (Huawei), but has seen a significant revenue uptick particularly for industrial concerns as new applications roll out. One thing I think has maybe delayed the impact here is the fact that multiple formerly large telecoms are imploding before our eyes--DISH sure looks like it might be next and it does have future contracts with Crown & Castle. But CCI's small cells business as a driver of the current dividend and growth projections isn't based on DISH--rather it's on the Big 3 which are benefitting as their rivals evaporate. Momentum is still moving against the stock so it will take patience to bet on recovery. But CCI is still a very good business, as well as an essential one.

Load More Messages

Connecting…

Your current subscriptions

None

E-mail Address	Chat Owner	Status	Remove

Enter your email address to be notified when Sherry Roberts hosts a chat